AAPL: Credit Suisse Says Play Strangles on $520 to $630 Range

By Tiernan Ray

Credit Suisse’s Kulbinder Garcha opines that there is downside support for the stock at $520, while upside is probably “capped” at $630.

Garcha, who has an Outperform rating on Apple and a $750 price target writes that “Apple remains privileged in the compute market with the ability to simultaneously address key segments of the compute market (PCs, tablets, smartphones) resulting in structural advantages.”

His assessment of the trading range is based on a review of historical forward P/E multiples:

Apple shares traditionally troughed (3 times) at 10x calendar year EPS in recent years. With the Street at $52.23 for CY13, that provides support at $520. We think Street EPS is overly conservative and our CY13 numbers stand at $60.19. Assuming the Street comes toward our numbers and closes half the gap, that would put consensus at $55 and with shares trading at 11.5x forward numbers, the near term upside could be capped at $630.

However, Garcha also recommends using options contracts called a “strangle” to actually trade that range:

For existing holders, we recommend selling a Jan’13 525-600 strike strangle, collecting $30.05, or 5.6% of spot. This translates into an annualized yield of 35% (reference price $537). Selling a strangle would monetize a range bound outlook in the near term. The break-even level is $495 on the downside, and $630 on the upside and appears attractive under our fundamental outlook. While 2-month implied vol has come in by ~5 vol pts since the Q4 earnings announcement, the drop in implied vol has only been half the historical average. Over the previous three quarters this year, AAPL experienced on average a 10pt decline in implied volatility following earnings announcements. Furthermore, even with the recent drop, AAPL 2M implied vol still currently trades at a premium relative to realized volatility. The downside risk to the trade is committing to buy more stock at an effective entry price of $495. The upside risk is having your stock called away at the call strike price.

Of note as well this morning, Doug Kass of Seabreeze Partners, who on November 9th started to turn more positive on the stock after leading the charge in negative sentiment weeks earlier, this morning writes in a missive to followers that there is a trading opportunity to go long “given the oversold nature of the markets and Apple’s recent deep dive.”

Kass also notes a report today from Morgan Stanley stating Apple could see upside in iPhone and iPad mini sales.

“I am looking at weekly call options now — I will likely be playing,” he writes.

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There are 28 comments

NOVEMBER 15, 2012 10:51 A.M.

Wet Paint wrote:

Not a bad idea, strangle Tim Cook. If you bought Apple two months ago looking forward to the iPhone 5 bounce, you are sick right now. The good news is that you can still short this play and make it all back in 2013.

Does this guy not realize the street isn't going to come close to his numbers? For a stock to drop this much so rapidly, that's a lot of big street players dropping HUGE positions they held in Apple. It's not just individual investors liquidating their position. The street looks to me like they're getting the hell out of Apple as fast as they can and the price reflects it.

NOVEMBER 15, 2012 11:34 A.M.

Paulo Lin wrote:

And I repeat again from yesterday's blog; .BTW, Danielle, Apple does not have the best phone. The iphone 5 is 1 year behind the Galaxy S3 and iOS6 is outdated. Android is way more sophisticated than iOS and that’s why Apple shares keep decreasing since the iPhone 5 was announced. Apple is behind in technology coming out with 4G LTE a year after the Galaxy S2 did. Read the news, the lack of innovation especially with the iPhone 5 and the iPad mini has caused Apple’s shares to drop by over 20% in less than 2 months. So instead of saying nonsense, look at the competition, more and more people are switching and want better and cooler. Apple is no longer the “Cool” thing out there. Bottom line

NOVEMBER 15, 2012 11:37 A.M.

Sal wrote:

Say goodnight kids to Apple and Tim Cook!

NOVEMBER 15, 2012 11:38 A.M.

No Jeff wrote:

Ho Hum, another day, another $10 for every leveraged Put I own... Get Rich or Die Tryin'.

Investing is easy, why do the so called "pros" keep such a Buy side bias? Maybe because they want the little guy to "buy" what they are "selling"? No, say it isn't so...

aapl is on it's way to $425, then $375, then who knows, maybe $229 - $150. Even then it is expensive, why would anyone pay $200 PER SHARE for a stock, it is just a piece of paper people!

NOVEMBER 15, 2012 11:41 A.M.

Ed wrote:

The only thing to starngle is the entire Incompetent and Useless Apple Management Team.

NOVEMBER 15, 2012 11:42 A.M.

Tom wrote:

Paulo Lin, if more and more people are switching, then why has the IPhone 5 broke every record out there for new phone sales? Surely that would imply that more people are switching TO Apple? It makes no difference how outdated their product is if the public are still buying it in record numbers. Sales matter, and Apple's sales are currently higher than almost if not every company in history.

NOVEMBER 15, 2012 11:49 A.M.

Market Mayhem wrote:

These analysts ought to be severely punished for lying to clients about Apple. Weathermen are more accurate about forecasting the weather than these jackasses are about Apple's share price. One day they're saying that Apple has started to rebound and the next day Apple is $20 lower than it was the day before. They have to be doing this on purpose or are they really that stupid. It's so easy to see that every hedge fund is selling Apple to make up for whatever losses they had. Why would anyone want to buy into that nasty headwind. Analysts need to be taken out and publicly flogged for their stupidity or willfully misleading clients to lose money. They're nothing but a bunch of criminals.

NOVEMBER 15, 2012 12:02 P.M.

No Jeff wrote:

@Market Mayhem Now you are starting to understand the market. I have over three months of full time experience as a professional investor and I can tell you it also took me weeks to really understand how stock markets work. The key is to understand that only chumps buy stocks, the smart money "shorts" them.

At first I didn't understand what short meant and it seemed scary. But now, with the help of my technical guru, I get it. The more you Short, the more $$$ you make! How hard it that? The big breakthru for me was "leverage", when you combine that with the above information on Shorting, you are ready to invest with rocket fuel.

Last week one of the other posters through I wasn't serious about buying a BMW, well I am, and this weekend I am going to go for it. I made more profits this morning than the car will cost, all by becoming an expert in the stock market. Should have done this years ago instead of working "for the man"!

NOVEMBER 15, 2012 12:15 P.M.

@ Paulo Lin wrote:

Show us one credible source that competitively compares the iPhone to the Gakaxy SIII. And the SIII won. Hmm. There's no proof to support your nonsense. You're off your noodle. The iPhone5 remains the best. Now bend over. It's happy time.

NOVEMBER 15, 2012 12:16 P.M.

@ Ed wrote:

Later today. Mr. Thorsten Heins would like you to polish his shoes and vacuum.

NOVEMBER 15, 2012 12:25 P.M.

freddysrvng wrote:

Right now I don't have time to put down Tim Cookie. It's lunchtime. I've got my favorite peanut butter and jelly. Mmm. Yum yum.

Did I also tell you?

On the weekend I picked up a new pair of Chuck Taylor Converse running shoes. While only a few more payments remain on my hair plugs. The mullet looks great. No one can hardly see the hair plugs my comb over is so artful. Once it's finnished growing out you will see me and the BB10 on YouTube. Bank on it.

NOVEMBER 15, 2012 12:37 P.M.

StonehamMel wrote:

"Don't invest with money you can't afford to lose."

The company sells all it can make and then some. People line up to buy its products. It has $120 billion in cash. Tens of millions of Chinese customers are waiting to buy their iPhone 5, now that it will work on China Mobile's system - but Foxconn has to meet enormous US and global demand before it announces availability. There is almost no measurable Android tablet Internet use. The PE ratio makes it arguably the cheapest stock in the S&P.

What's going on now doesn't shake this long term investor. I'm up more than $200/share from where I bought the first batch, sold a pile at $648, and bought Apple Stars with the proceeds, which protects me seriously.

Grow up, people. If this isn't money you can't afford to lose, cash out and buy a bond.

NOVEMBER 15, 2012 1:10 P.M.

No jeff wrote:

@StonehamMel You go man, I completely agree with you that aapl is $200 overpriced. Good call selling out of this puppy. Next stop, $425.

Apple is immediately selling every iPhone and iPad it can make and is having an all-time record quarter whether you think their products are not cool or outdated. See today's Morgan Stanley Apple report saying their sales are exceeding estimates on both iPhones and iPads. And the iPhone5 hasn't even been released yet into the largest cellphone market China and Taiwan.

Apple stock remains way undervalued.

NOVEMBER 15, 2012 1:22 P.M.

Joemiz wrote:

Apple is old tech - iphone 5 is like a joke and so is the ipad mini - Surface computer blows ipad into the water Nokia & Samsung are doing some nice work - Again I'm seeing more Galaxy's 3s and Nokia's and that will continue

The only sellers are those who have a huge gain and are afraid of a huge capital gain tax increase. Once there is clarity on this issue, this stock is going back up over 650.
iPhone 5 the best in the world; no cache with lame copycat Android, best laptops and desktops and tablets and...
You get the idea
This is classic Wall Street shaking out the weak players...see you at 700.

NOVEMBER 15, 2012 1:59 P.M.

Ed wrote:

Rimm is the new King

NOVEMBER 15, 2012 2:18 P.M.

40yeartrader wrote:

Wet Paint,

If you bought any company once at any price, you should have a REAL game plan.

Why does someone buy at $700, for a trade?? They had stops and they are out already. If they didnt have stops then they deserve to lose money since trading always requires stops.

Why does someone buy at $700, for Fundamentas? They know this is a multi-year holding and the profit growth has a back stop above 15% .....EASY money over the next 5 years.

If you are a trader, never trade one direction.

if you are an investor buy based on REAL facts, REAL numbers...ignore the online BS and NOISE!!! If you are an investor and buy at $700, you should be buying at $530 too....its simply a no brainer when it comes to REAL math behind this stock.

Also don't buy the silly stock, 2014 LEAPS are a steal right now....and the profits in these LEAPS are going to be huge, like they have been EVERY YEAR the last 5 years.

NOVEMBER 15, 2012 2:19 P.M.

Ed wrote:

Just kidding! Ah haha. BB10 is DOA.

NOVEMBER 15, 2012 2:51 P.M.

Joe wrote:

Samsung is just knocking it out of the park, while Cook and Apple cannot do anything right. Wait until Samsung drops the nexyt shoe and sticks it up Apple's as_! Then you see 300

NOVEMBER 15, 2012 3:22 P.M.

Paulo Lin wrote:

Yes, the ipad is the most sold tablet but not the iphone, the smartphone market for Apple is decreasing while Android is increasing. The iphone 5 is old news… bigger screen and already "been there" 4G LTE? WOW let me run out and buy one! The ipad mini has no "Retina" (Apple’s hocus pocus term for higher resolution) and costs 40% more than the Nexus, why? Not because it’s better, read the reviews. Apple keeps feeding huge profits from people that don’t know better. Unless Apple comes out with something new and innovative lets watch the stock keep falling.

Oh by the way, I'm not the one that needs to "bend over", "Happy Time" has come to you now, not me ;-), Apple down another $13 today so far to $523 for the all high of $705 just before the iPhone 5 announcement!!! LOL what a great product that iPhone 5 has done for Apple

NOVEMBER 15, 2012 4:25 P.M.

No jeff wrote:

Well. it's 1:30 PM and another great day is already finished, Miller Time my fellow aapl investors. Routine is set for remainder of the year, some days we get $5.00 down and other days we get $10+ down. There is at least another 20 trading days of this action ahead, throw in a few "Bull Bait" up days and you've got a pattern for the remainder of the year, bring up to sub $300 by Christmas. Going to double down on my put strategy over the next week or so.

NOVEMBER 16, 2012 11:41 A.M.

JB wrote:

40yeartrader : I think you provided the most rational and useful post, especially for new money.

Total joke: I strongly agree with your cap gain / shakeout theory. Moreover, if you analyze some of the big money (e.g., SAC, Einhorn), you'll find that they did lock in gains for a PORTION of their AAPL holdings, but retained most of their position.

No Jeff: While you're waiting for AAPL to be "on it’s way to $425, then $375", please update your post after AAPL reports earnings in Jan 13 and Apr 13.

NOVEMBER 17, 2012 3:30 A.M.

Greg wrote:

Dear mr. Ray.

Your article has a mistake it should read Jan 14 straddle not Jan 13. 30 dollars of premium is for the Jan 14 calls. Not the Jan 14.

@ no Jeff you couldn't be mor wrong. Stock price means nothing. Whether 500 50 or 5. And buying puts on Friday show you the pain of doing naked put plays. They work both ways. You clearly know nothing

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.